Building Wealth Doc's note: Everyone's always asking me about cryptocurrencies. Readers regularly flood my inbox with questions on cryptos, but I'll admit... I'm no expert. So today, I'm sharing an issue from our in-house crypto expert, Eric Wade, where he answers the questions a lot of us have but are too embarrassed to ask.
If you've ever thought about investing in cryptos, this is a must-read...
Over the past couple of years, you've probably heard a lot about cryptocurrencies...
Bitcoin – the original and oldest cryptocurrency – went on a tremendous run in 2017, soaring roughly 2,000% in less than a year... peaking at nearly $20,000 that December. But just as quickly, bitcoin plunged more than 80% throughout 2018.
Fast-forward to April, when the price soared to a new all-time high above $60,000... more than triple its price at the end of 2020. Today, bitcoin sits just over $30,000.
It's a hot-button topic in financial circles...
The crypto space is full of fantastic opportunities. However, many individual investors simply don't know how cryptos work – or what they're good for.
So in today's essay, I will answer several common questions to help you better understand this space. If you want to make money in cryptos, you need to know the basics first...
What is a cryptocurrency?
It's a long-running joke in the industry that the hardest thing about cryptocurrencies is explaining them without taking an hour to do it. It's a complex topic, but here's my one-sentence definition...
A cryptocurrency is a computer program that makes digital coins and tokens that anyone can use over an extremely secure network.
At their heart, they're computer programs – or teams of computer programs that all work together.
Bitcoin – which you'll often see written as "BTC" or, less frequently, "XBT" – is the best-known crypto and the easiest to understand... Physical "bitcoins" don't exist. You can't hold them. Bitcoin is simply digital money that isn't controlled by a government, group of people, or corporations.
One part of the bitcoin computer program allows the safe transfers from one bitcoin investor to another. That should make sense... If you're going to use bitcoin as a currency, you need a way to send and receive it.
Another part of the program watches every transaction, making sure no fake or fraudulent transactions take place before they're verified. Since we're talking about hundreds of millions and sometimes billions of dollars in bitcoin exchanging hands every day, preventing fraud is important...
It's like credit-card company Mastercard suddenly announcing that anyone in the world can download its software and start verifying its transactions in exchange for a cut of the fees. That's how the bitcoin computer program works... Anyone can run the program and even verify transactions for a cut of the transaction fees.
Yet another part of the bitcoin computer program works like a ledger, keeping a permanent record of all the transactions. The ledger is like bitcoin's accounting books... It's a public list of all the bitcoin transactions that have ever happened.
For example, if Alice pays Bob for a service with a bitcoin, it's recorded in the ledger for both people. But not only that... It's also recorded in the ledger by Carl, Debra, and anyone else who runs the bitcoin program.
(Of course, that's a simple explanation because on the bitcoin network, people's names aren't used. Instead, the ledger uses unique bitcoin addresses... They're like super-long phone numbers.)
You'll commonly hear this ledger called a "blockchain."
The blockchain was one of bitcoin's biggest innovations. Since every transaction is public, it can be verified by anyone else within minutes in most cases. While every bank in the world shuts down and reconciles its database with other banks every night, bitcoin runs 24 hours a day.
The word "crypto" comes from bitcoin's super-strong cryptographic code... In other words, it's the same type of secret code used to protect highly classified government information.
The code makes sure the bitcoin network and the ledger stay secure... Alice doesn't want Bob to be able to steal from her – or to even guess her password. And no one else wants the database to be manipulated... So they're all protected with the secret code.
With cryptocurrencies, all these pieces of the puzzle work together to make it possible for us to buy, sell, and transfer them safely... even though no one is in charge.
That's right. No central party – like a bank or government – is in charge of bitcoin. It's why you'll often hear cryptos like bitcoin referred to as "decentralized."
The blockchain has spurred radical innovation in non-financial industries, too...
For example, some cryptos can be used to transfer virtual items in video games. Others track pharmaceutical drugs from their raw ingredients all the way to a hospital bed... help build artificial intelligence networks or insurance marketplaces... and countless other uses.
In short, cryptos are already touching almost every industry on the planet.
OK, so I know bitcoin is a crypto. But what other cryptos exist?
Yes, bitcoin is a crypto. And at least for now, it remains the biggest and the most popular.
But after bitcoin launched, all sorts of entrepreneurs dreamed up ways to make their own cryptos with different features than bitcoin...
For example, Ethereum (ETH) supports "smart contracts," which enable automatic financial transactions. And Binance Coin (BNB) can get you discounts and other benefits on the world's busiest crypto exchange, Binance.com (and its American counterpart, Binance.us).
Bitcoin is extremely strong – some experts say it can't be hacked – but it's also pretty slow when it comes to verifying transactions. Imagine if you're buying groceries... Instead of swiping your card and being approved in seconds, it can take minutes – or hours, in rare cases – for bitcoin to verify a transaction. So faster cryptocurrencies were developed.
Also, in recent years, other cryptos came along that can better protect your privacy by hiding information about your transactions. And others added specific features like a built-in programming language or "programmable money." That unlocks the potential for automated financial transactions...
Imagine, for example, if you only had to pay for insurance when you were physically driving your car. Thanks to smart contracts – financial transactions that don't require human intervention – that day will come. Smart contracts are impacting everything from the lending industry to prediction markets to robotics and more.
Other cryptos target specific-use cases. Called "utility tokens," they grant the holder certain privileges... for instance, voting rights or access to a specific service.
We're also seeing more "security tokens" emerge... They're similar to stocks and can do things like pay dividends, include embedded financial reports, and more.
It's hard to know how many cryptos we actually need in the world...
You see, of the thousands of cryptos that exist, we only like a few dozen or so right now.
Some cryptos are designed to serve as a currency – like bitcoin.
But as I said, many cryptos have been created to complete company-specific tasks or other narrow-focused ones... These tasks can range from tracking real gold to verifying data to even proving you're old enough to purchase alcohol without sharing your personal information.
This year and beyond, we expect to see these specific-use cases soar. Already, you can find cryptos for banking, advertising, voting, investing, betting, making music, tracking our food supply, verifying art... and hundreds more.
So while we have a narrow focus on certain cryptos we like today, that could change in the coming months and years as some of these new, innovative cryptos prove their values.
Good investing,
Eric Wade
Editor's note: According to Eric, bitcoin was the FIRST step in the crypto revolution... But now, he says there's an opportunity in front of us today that is the next step. On Wednesday, Eric is hosting a summit where he'll show you how to take your hard-earned dollars and turn them into income yields of 10%... 20%... even 30% or more per year. Click here to reserve your spot.